Feedback, Self-Esteem, and Performance in Organizations

We examine whether private feedback about relative performance can mitigate moral hazard in competitive environments by modifying the agents’ self-esteem. In our experimental setting people work harder and expect to rank better when told they may learn their ranking, relative to cases when feedback will not be provided. Individuals who ranked better than expected decrease output but expect a better rank in the future, while those who ranked worse than expected increase output but lower their future rank expectations. Feedback helps create a ratcheting effect in productivity, mainly due to the fight for dominance at the top of the rank hierarchy. Our findings suggest that organizations can improve employee productivity by changing the likelihood of feedback, the reference group used to calculate relative performance, and the informativeness of the feedback message. We thank Terrance Odean (the editor), an anonymous referee, as well as Pierpaolo Battigalli, Stefano DellaVigna, Shimon Kogan, David Myatt, Jonathan Parker, Imran Rasul, Paola Sapienza, Nora Szech and participants at the 2008 ESA European Meeting, the 2008 La Pietra-Mondragone Theory Workshop, the 2008 International ESA Conference, the 2008 NBER Behavioral Finance Meeting, the 2009 IZA Workshop on Genes, Brains and Labor Markets, and seminar participants at New York University, Northwestern University and U.C. Berkeley for valuable comments and discussion. This paper was previously circulated as “Rank expectations, Feedback and Social Hierarchies”. Department of Finance, Kellogg School of Management, Northwestern University, 2001 Sheridan Rd., Evanston, IL 60208-2001, [email protected]. Kuhnen gratefully acknowledges financial support from the Zell Center for Risk Research. New York University, Center for Neural Science, 4 Washington Place, New York, NY 10003, [email protected]. Forthcoming in Management Science